Brussels, 10/04/2008 (Agence Europe) - On Thursday 10 April, the European Central Bank (ECB) decided to keep eurozone interest rates unchanged. The minimum bid rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4%, 5% and 3% respectively. Given the existence of “strong short-term upward pressure on inflation” and the protracted period of temporarily high annual rates of inflation resulting mainly from increases in energy and food prices, the ECB has no choice, its president, Jean-Claude Trichet, said. “We emphasise that maintaining price stability in the medium term is our primary objective in accordance with our mandate”, Trichet pointed out after the meeting of the Governing Council, which took a unanimous stance in favour of leaving rates unchanged. He went on to add: “the firm anchoring of medium to longer-term inflation expectations is of the highest priority to the Governing Council and there is certainly no room for complacency in this regard”. Warning against second-round effects and the materialisation of upside risks to price stability over the medium term, he said the ECB will continue to monitor “very closely” all developments over the coming weeks.
The economic fundamentals of the eurozone are on the whole sound. It does not suffer from major imbalances but uncertainty surrounding growth remains high and downside risks prevail. Financial market turbulence could, in particular, last longer than initially thought and have a broader than currently expected impact on the real economy. The International Monetary Fund (IMF) believes the economic activity of the eurozone should slow down in 2008 and 2009 and the ECB should take this into account. According to forecasts presented to the press on Wednesday 9 April, the IMF considers that growth of the Fifteen should struggle to reach 1.3% this year (1.8% in Spain, 1.4% in Germany and France, and 0.3% in Italy). At the same time, it is tabling on a price rise of 2.8% in 2008, but foresees a return to inflation of 1.9% in 2009. Thus, with the increasingly negative outlook for growth and inflationary forecasts again below 2%, the “ECB can afford some easing of the policy stance”, the IMF had said the day before the meeting of the Governing Council. Such a recommendation did not weigh heavily against inflationary pressure identified by the ECB. In March, forecasts by the ECB services were a little less pessimistic than those from the IMF for growth (growth ranged between 1.3% and 2.1% for 2008 and between 1.3% and 2.3% for 2009) but were considerably higher for price levels (between 2.6% and 3.2% this year and between 1.5% and 2.7% in 2009).
Since then, things have remained the same. In March, the consumer price level increased by 3.5% over one year and “is likely to remain significantly above 2% in the coming months, moderating only gradually over the course of 2008”, Mr Trichet repeated on Thursday. “We are currently experiencing a rather protracted period of temporarily high annual rates of inflation”, he added. Among the risks for price stability, there is a risk that price and wage-setting behaviour could add to inflationary pressures. The second-round effects “must be avoided”, stressed the ECB president, again calling on social partners to show responsibility. Finally, the Governing Council is mainly concerned by the existence of automatic mechanisms of indexing salaries on prices (when prices in a basket of products exceeds a certain threshold, salaries are automatically brought into line). Such mechanisms could generate a wage-price spiral and must therefore be avoided, Trichet believes. Belgium and Luxemburg, the only two countries using such mechanisms, do not however intend to give up this practice at a time when the debate on purchasing power is at its height, the Belgian and Luxembourg prime ministers pointed out. (A.B.)